Microsoft claims Comet created more than 94,000 of the recovery CDs for Windows Vista and Windows XP, and sold them on to customers who purchased Windows-loaded PCs and laptops from its stores.
David Finn, worldwide anti-piracy and anti-counterfeiting general counsel at Microsoft, said: "Comet produced and sold thousands of counterfeit Windows CDs to unsuspecting customers in the United Kingdom.
"Comet's actions were unfair to customers. We expect better from retailers of Microsoft products — and our customers deserve better, too."
Comet has acknowledged the suit filed by Microsoft and claims its actions have not infringed Microsoft's intellectual property rights.
It issued the following statement: "Comet has sought and received legal advice from leading counsel to support its view that the production of recovery discs did not infringe Microsoft's intellectual property.
"Comet firmly believes that it acted in the very best interests of its customers. It believes its customers had been adversely affected by the decision to stop supplying recovery discs with each new Microsoft Operating System-based computer.
"Accordingly, Comet is satisfied that it has a good defence to the claim and will defend its position vigorously."
Reports claim private equity firm OpCapita knew about the impending lawsuit before agreeing to buy Comet from its owner Kesa Electricals for £2.
The suit filed by Microsoft claims the counterfeit CDs were made in a factory in Hampshire.
Follow Matthew Chapman at @mattchapmanUk